I am curious to what your International versus U.S. stock allocation is and why? Mine is currently 70 % U.S. and 30% International. I am considering going 50/50 for broader diversification. Can you please explain the pros and cons of going to 50/50 mix instead of 70/30?

The "con" is that you are not staying the course. Did you write down your reasons for choosing 30% in the first place? If not, do your very best to recall when you decided on 30%, and what your reasons were. They don't need to be anything very profound. I do lots of things for shallow and even foolish reasons. You're not trying to impress anyone, you're trying to understand your own investing strategy. It could be something as simple as "I decided on 30% because that's about what Vanguard has in its all-in-one funds," or "I decided on 30% because that was suggested in [name the book or article]."

And then do your very best to articulate what you think has changed that would justify changing course. Again, don't try to impress anyone with the reason, just try to identify what the reason really is.

John C. Bogle has written "Successful investing involves doing just a few things right and avoiding serious mistakes." So the question is: do you believe your original decision to be 30% international counts as a serious mistake? If not, should you be changing?

By the way, I would be posting exactly the same thing if you said your allocation was 50% international and that you were thinking of changing it to 30%.

We're 70% US 30% International. We picked this allocation after reading "The Intelligent Asset Allocator" pages 47-49. This combo looked to be about the best in terms of annual return vs. standard deviation. So we picked that and we're sticking with it.

My reasoning is the mess the US is in financially but you could counter so is the rest of the world. However, a total international Vanguard fund seems like it would provide more diversification, as it invests across multiple countries.

Everybody seems to agree that it makes sense to hold at least 20% international because it lowers volatility a lot. Everyone also seems to agree that it makes little sense to allocate more to international than its global portion of the market, which is something like 55-60%. So I picked 40% international because it was in the middle.

I heard two convincing arguments, one for 40% international, one for 50% international, so I split the difference and am 45% international. I don't even remember the original arguments. I should have written them down but didn't. Now I just stick with 45% because it is good enough, and I see no reason to change.

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The most important thing you should know about me is that I am not an expert.

A little over 40%, for no particular reason. As a study by Vanguard points out, it's best to just pick some number between a minimum of 20% and a maximum of the market weight of international. It matters more that you stick with your chosen number than what the number is.

The historical evidence suggests that raising the international allocation to at least 40 percent reduces portfolio risk (volatility). Also, if your job is most at risk when the domestic economy is bad, an allocation of 50 percent or perhaps even a bit higher may be appropriate.

Also, he suggests another 10% int'l if you have equity risk in your company.

I just copy the US-vs-non-US split implemented in Vanguard Total World Stock Market. I live in the US but I think it makes sense to follow the overall global markets rather than hope that the US will outperform everyone else.

I think the 70/30 mix that Vanguard settled on relies too much on data mining, US-centrism, and historical baggage (international stocks have historically been seen by US investors as risky or exotic). Then again, the difference between 70/30 and 50/50 isn't drastic, so I'm hardly railing against them here. It's a relatively minor quibble.

Interesting that people who would advocate holding no more than 10% in company stock would advocate for over stocking your US/Intl ratio. The real Bogle answer should be to hold the market, meaning something like 50/50 or even more, favoring international over US. Although the United States shows signs of being very stable, far more so than any company and most countries, you will be hurting already if there is a major economic crisis (like the depression) and it is possible, but not certain, that holding a strong international portfolio can buffer that. It is also possible that our depression was started by an economic disaster in Europe or Asia, and that going intl could hurt more. But the efficient choice seems to be to simply hold the entire market, including I would add, some international debt.

Along the way I read many convincing pieces that suggested international small was an excellent diversifier to large-centric US equity portfolios. I also found the idea that the EAFE & S&P 500 are likely to deliver roughly similar returns over long spans of time with relatively similar volatility [although more expected from EAFE], but those returns would come at different times was also compelling. Rebalance along the way and get a desireable result.

An investor that believes those two things [as well as FF] might have a portfolio like this:

20% S&P 500 or TSM or US LV20% EAFE or TISM or FTSE LG20% US SV or SB or combo20% International Small [blend is easy]20% bonds [u pick-em']

Rebalance on some typical method and there you are.

Note: the point of that example is that the US LG & INT LG are split equally as are the US Small and INT Small. You could dial-up the bonds to any level suitable and keep those equity components equally weighted.

When my former firm elected to dump its high-fee, high ER plan admin and go with Vanguard, I was defaulted to VBINX. After I left, when I finally got around to transferring my 401K to a Vanguard TIRA, I was still somewhat ignorant about "international" diversification. When I finally figured out that I should pick up some international, I recall reading (somewhere) that 20% of your total equity allocation should be in international, so that's what I picked. Later, I modified the mix a tad by over-weighting emerging markets in that 20% by choosing 16% total international and 4% emerging markets.

I guess I missed the part about a "minimum" of 20%, but that's where I started, and that's where I remain. As it turned out, being on the low end of the spectrum (20% versus, say 40% or 50%) fit very nicely with my risk tolerance as events unfolded in Europe and Japan's economy continued to stagnate.

If having the proper allocation means being able to shrug and "stay-the-course", then my dart-board worked.

The 50-50 split domestic-international is done because of simplicity and because it approaches cap-weighting (maximum diversification). The other 50-50 splits are to increase expected return, since I hold less than 50% in equities overall.

The 50-50 split domestic-international is done because of simplicity and because it approaches cap-weighting (maximum diversification). The other 50-50 splits are to increase expected return, since I hold less than 50% in equities overall.

Call me op, I am struggling with percentages and trying to keep it simple and set/done. Can you explain why you think overweighting emerging markets increases the expected return? And if it does, does the risk increase p?

The 50-50 split domestic-international is done because of simplicity and because it approaches cap-weighting (maximum diversification). The other 50-50 splits are to increase expected return, since I hold less than 50% in equities overall.

Call me op, I am struggling with percentages and trying to keep it simple and set/done. Can you explain why you think overweighting emerging markets increases the expected return? And if it does, does the risk increase p?

Calm Man, this conclusion is based upon back-testing over the past 40 years. EM stocks have exhibited higher returns, greater volatility (a goes-with), and have tended to exhibit lower correlation to US equities (compared to developed international stocks).

Simply put, Admiral ER is 6 vs 18 Total US vs Total international.12 basis points advantage, is the only known, the rest is speculation.Recent results over last decade, show the two generally move in same direction, different amount but same direction, and over many periods come out in the same place in total return.

I see the ER difference as a reflection of less efficient markets outside the US.Why overweight in reduced efficiency ?

I am 70/30, and that 12 bps on the 30 bothers me, but have to have some diversification. When ER comes down for total international (and it has declined a bit) would consider moving to 40 or 50 percent.

blevine wrote:Simply put, Admiral ER is 6 vs 18 Total US vs Total international.12 basis points advantage, is the only known, the rest is speculation.Recent results over last decade, show the two generally move in same direction, different amount but same direction, and over many periods come out in the same place in total return.

I see the ER difference as a reflection of less efficient markets outside the US.Why overweight in reduced efficiency ?

I am 70/30, and that 12 bps on the 30 bothers me, but have to have some diversification. When ER comes down for total international (and it has declined a bit) would consider moving to 40 or 50 percent.

IMHO, that's a lot of diversification to ignore for 12 basis points. By the way, there are funds where you can invest internationally for 10 basis points total.

My complete newb answer is based on these thoughts:1) that the larger US companies have more and more international economic influence in them (I think I read this in Swedroe, and it made sense.)2) that a few percent EM reduce volatility.3) that I'm heavier in stocks than typical for my age (due to extreme longevity running in my family).

With this in mind, my goal is 25% international with 5% of that EM. This would be the same raw amount of total international if I were doing about 35% of a more conservative % of stocks or 40% of a very "play it safe" % of stocks. This may be voodoo hogswill, but this is my thinking.

My reasoning is the mess the US is in financially but you could counter so is the rest of the world. However, a total international Vanguard fund seems like it would provide more diversification, as it invests across multiple countries.

Your thoughts?

I echo the general feeling here: ballpark is probably good enough (20-50%). I agree with Nisi's advice to "don't just do something, stand there!" esp. b/c of your reasoning above - macroeconomic concerns. If anything, you should be moving towards the more troubled regions (buy low, sell high). But don't - Boglehead philosophy stays the course... pick an allocation you can sleep with, and tune out the noise. Remember the stink about Europe earlier this year, and how Total [US] Stock opened up a 10% gap over Total Int'l in just a few weeks? It's over. Well... for now.

A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology

I like the elegant simplicity to that ratio as well. I also remember my AA of (being an AIB investor) 2/3 equities, 1/3 fixed, but that was a decade ago, so I now look forward to the 1/2 equities, 1/2 fixed AA that I'm scheduled to hit in 2.5 years.

The unintended consequence of approaching 50% fixed is that I'm less hung up on my domestic/int split now that less money (as a %age) is exposed to equity risk.

Wouldn't the success of the international stock market largely be correlated with that of the US market?

The US is so interconnected with the rest of the world that I can't see how the int'l index would really offer that much more protection from a diversification standpoint. i.e in 2008 the international index was majorly impacted also.

InvestorNewb wrote:Wouldn't the success of the international stock market largely be correlated with that of the US market?

The US is so interconnected with the rest of the world that I can't see how the int'l index would really offer that much more protection from a diversification standpoint. i.e in 2008 the international index was majorly impacted also.

Also many US companies already have a global presence to begin with.

The general conclusion is that as markets become more efficient and "mature", correlations will rise. But off course, they can jump around all over the place. The non-correlation this summer shows exactly why you would want to diversify internationally (sure, it was underperformance this time, but next year could be different).

I think it helps enormously to remember that you become a partial owner in an actual, physical, decision-making company. Remember that Total Int'l means you know own a tire-manufacturer in Brazil, an oil producer in Dubai, and a IT firm in India. That's real diversification across even more industries, more political environments, more languages and worldviews, more actual physical spaces on planet Earth (a tsunami here or there, or even a huge power outage now has essentially no effect). To achieve that kind of diversification with a few clicks and just a few basis points is mind-blowing (historically speaking).

A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology

First of all, kill that "US companies do business internationally, so US is international" nonsense. Stock ownership is not about owning operations, it's about owning corporations. If you hold Apple and skimp on Samsung, you're underdiversified. You get hurt when Samsung bites Apple. Having said that, 70/30 is better than 100/0.

The 70/30 optimum exists, but it only exists in the past. There are a couple arguments that explain increased volatility of intl (political and currency risks), but they are not convincing enough for me to go more than 2:1 US/Intl.

In some past decades, the increased volatility of intl was handsomely rewarded.

I think a lot of people pick 40%, because it's half way in between Vanguard's Target & Life fund's 30% and the worlds 50% weighting. A lot of retirees have 40% stocks/60% bonds, so 40% Int/60% US keeps things simple.

I understand the argument of US companies have huge international exposure. If an investor does not want international, while I may not agree, so be it. As Robert De Niro says "There is a flip side to that coin." - international entities have a huge business here in the US.

John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" |
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Disclosure: Three Fund Portfolio + U.S. & International REITs

FNK wrote:First of all, kill that "US companies do business internationally, so US is international" nonsense. Stock ownership is not about owning operations, it's about owning corporations.

That is an area in which there seems to be great inconsistency. I am not saying that you are inconsistent, I'm just saying that I find it difficult to process contradictory notions. For example, advocates of emerging markets frequently say we should overweight emerging markets to reflect the actual economy of emerging markets nations rather than the capitalization of their stock-issuing corporations, i.e. operations rather than corporations. Similarly, REIT advocates advocate overweighting REITS on the basis that the stock market does not fully reflect the economic importance of real estate, small-cap advocates say you should up the percentage of small-cap to compensate for the small companies you can't invest in, etc. etc.

Obviously holding a global portfolio will give you somewhat greater diversification (at the expense of currency risk) than holding a domestic-only portfolio. It's equally true that Vanguard Total Stock Market Index Fund gives you greater diversification than holding Vanguard 500 Index. And yet, you'd be hard-pressed to show that holding 500 Index instead of Total Stock has ever ruined anyone's retirement. In the case of international, the question is whether the volatility reduction you get from the imperfect but high correlation of international and domestic outweighs the extra volatility you get from the currency risk of the international.

Last edited by nisiprius on Sun Dec 23, 2012 5:24 pm, edited 1 time in total.

I have had the opportunity to travel around the world to many developed and emerging economies for work and pleasure. There are smart, hard working people everywhere in the world who relish opportunities to succeed. Sometimes there are significant constraints like corruption, famine, or political rivalries -- but I'm not one to bet against human nature over the long term. Some will say that we have no reason to expect the next 50 years will be any different than the last 50 years. I take the opposite view: I have no reason to expect the next 50 years will be anything like the past 50 years. I want to invest in everything because I don't know what the future will bring.

nisiprius wrote:For example, advocates of emerging markets frequently say we should overweight emerging markets to reflect the actual economy of emerging markets nations rather than the capitalization of their stock-issuing corporations, i.e. operations rather than corporations.

Excellent point! An efficient international corporation has a great chance of entering an emerging market and wiping out a local incumbent. I, for one, don't believe in overweighting emerging markets.

nisiprius wrote:Similarly, REIT advocates advocate overweighting REITS on the basis that the stock market does not fully reflect the economic importance of real estate

Now you're talking what a corporation (or a trust, to be more precise) does, as opposed to where it does it.

nisiprius wrote:small-cap advocates say you should up the percentage of small-cap to compensate for the small companies you can't invest in, etc. etc.

And now you're talking how big a corporation is.

My point is much simpler: where the corporation is registered and where is operates are two independent things and you should not substitute one for the other.